Ghost stores, lost billions as Korea Inc's China woes grow

Cynthia Kim, Adam Jourdan

6 Min Read

SEOUL/JIAXING, China (Reuters) - On a faded notice pasted to the padlocked doors of the Lotte Mart superstore in China’s Jiaxing, a date can still be read: March 6, 2017 - when the store was ordered to “temporarily” close over alleged fire safety issues.

The shuttered entrance and flapping notices are a blunt reminder of how South Korean businesses have become unwitting victims in a year-long diplomatic stand-off between Beijing and Seoul.

Last September, Chinese President Xi Jinping warned his South Korean counterpart that bilateral ties would suffer if Seoul did not properly handle China’s opposition to the planned deployment of a U.S. anti-missile defense system in South Korea.

Now - with the system’s installation mostly complete amid growing threats from North Korea - the fallout is evident in both the shuttered Chinese stores of Lotte and the empty Seoul shopping districts once jammed with Chinese tourists.

The Jiaxing outlet, southwest of Shanghai - along with around 90 other Lotte Mart stores in China - remains shut over its supposed fire safety violations. No inspectors have turned up despite what Lotte says were repeated entreaties to rectify the problems.

A skeleton staff say they are being paid minimum required wages, but Lotte is now considering selling up.

NEVER WORSE

Upset over Seoul’s decision to deploy the Terminal High Altitude Area Defense (THAAD) system, tour operators say China has quietly banned groups traveling to South Korea, once one of the most popular destinations for Chinese tourists. Cruises have erased Korean ports from their trips and some flights have been cut.

“Things have never been worse since formal diplomatic relations were established between the two in 1992,” said Han Jae-jin, an economist at the Hyundai Research Institute.

Seoul and Washington say THAAD is purely a deterrent to nuclear-armed North Korea, but Beijing worries the system’s radar can penetrate its territory and will upset the regional security balance.

Publicly, Beijing has maintained it supports “normal business” and other exchanges with South Korea has not commented on the situation with Lotte or tour groups.

Near Dongdaemun in Seoul, a major shopping district, an outdoor wear popup store had signs reading “Thaad retaliation shock! Going out of business sale!”. Dozens of similar signs were seen across the 24-hour shopping precinct.

Cho Kyung-suk, who has been selling women’s bags for 15 years in Dongdaemun, closed one of his three stores in February.

”Without the Chinese tour groups and buyers, I was making only about one fifth of what I used to,“ Cho said. If big companies are doing badly, imagine us.”

VANISHING SHOPPERS

The number of Chinese tourists, which used to account for about half of all visitors to South Korea, halved in the first seven months of 2017 compared to a year ago. That meant $5.1 billion in lost business for South Korea, based on the average spending of Chinese visitors in 2015, data from the Korea Tourism Organization shows.

Without the THAAD backlash, Asia’s fourth-largest economy was expected to grow more than 3 percent this year. The current forecast is 2.8 percent, according to the Bank of Korea.

In China, Lotte has been at the center of the storm, thanks to a land swap deal it agreed with Seoul so THAAD could be installed.

Half a dozen Lotte Mart workers around China who spoke to Reuters said there was no sign stores were going to reopen. Lotte employs around 13,000 Chinese workers across the country.

“Closing down our China business is one option we consider in the long-run as we can’t leave the stores closed like that for years,” an official at Lotte Mart’s Seoul office said, declining to be named.

Some local Jiaxing residents said China’s response was warranted, even if it meant some other stores and restaurants nearby also closed or suffered.

“The shutdown is all linked to THAAD,” said Gao Yunfei, 22, an e-commerce worker from Anhui province outside the closed Lotte Mart store in Jiaxing. “It’s as it should be, it’s just a reflection of people’s love for their country.”

K-POP TO DUTY FREE

Back in South Korea, the country’s $8 billion duty-free market, the world’s largest, is also struggling.

In wealthy neighborhoods of Sinsa and Apgujeong in southern Seoul, where posh boulevards are packed with flagship stores and celebrity hair salons, retail rent prices have dropped to the lowest since 2013, according to the Korea Appraisal Board and local realtors.

The Korea Duty Free Shops Association has asked regional airports across the country for rent discounts. Lotte Duty Free - the country’s biggest duty free operator - is even considering closing its flagship store in Incheon International Airport, after incurring its first quarterly loss since the 1980s this year.

“We don’t think the THAAD issue will be resolved anytime soon, and there is nothing we can do to help,” an official at the Lotte Duty Free said, asking not to be named.

With hopes of better ties, Lotte is still keeping its Chinese supermarkets, while big exporters like Hyundai Motor (005380.KS) are muddling through even after its China car sales tumbled over 60 percent in the second quarter.

But small shops don’t have that luxury, said a children’s wear stall owner surnamed Shin in Dongdaemun.

Chinese buyers were impossible to replace, even though vendors were trying to target visitors from Japan and Thailand.